Higher education funding in England - BRIEFING PAPER - Parliament.uk

 
Higher education funding in England - BRIEFING PAPER - Parliament.uk
BRIEFING PAPER
    Number 7393, 17 July 2018

    Higher education                                                                       By Paul Bolton

    funding in England
                                                                                           Inside:
                                                                                           1. Background
                                                                                           2. Public spending on higher
                                                                                              education in England
                                                                                           3. Funding for institutions from the
                                                                                              funding councils

www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary
Number 7393, 17 July 2018        2

Contents
Summary                                                                                       3
1.      Background                                                                            5
1.1     ‘2012’ reforms                                                                        5
1.2     Comprehensive Spending Review 2010 and later spending rounds                          6
1.3     Summer Budget 2015 and Spending Review/Autumn Statement 2015                          6
1.4     Prime Minister's October 2017 announcement                                            7
2.      Public spending on higher education in England                                         8
2.1     Direct funding through the funding council                                             8
        Teaching                                                                              10
        Research                                                                              11
        Other                                                                                 11
2.2     Student loans                                                                         12
        Subsidy elements of loans and loan accounting                                         12
        Estimates of the resource costs of loans from 2012                                    13
        Impact of loans on the national debt                                                  15
2.3     Student support                                                                       16
2.4     Overall public spending                                                               16
        Up to 2018-19                                                                         17
3.      Funding for institutions from the funding councils                                    17

     Please contact papers@parliament.uk if you need any of the data in this document or
     would like any of the images it contains (charts, maps, tables) in a different format,
     such as larger text, bigger scale, black & white charts etc. We will try to meet such
     requests.

     Cover page image copyright: Spread of £50 notes by Bank of England. Licensed
     under CC BY-NC-ND 2.0 / image cropped.
3   Higher education funding in England

    Summary
    The Government raised the cap on tuition fees for new student to £9,000 in 2012/13 and
    cut most ongoing direct public funding for teaching in England. This shifted the balance
    of higher education funding further away from the state and further towards the
    individual who benefits.
    In his summer Budget 2015 the Chancellor announced the biggest changes to student
    finance since 2012:
    •      Maintenance grants will end for               FUNDING FOR HIGHER EDUCATION INSTITUTIONS
           new students from 2016/17 and be
           replaced by loans.                                 HEFCE      Fees                                                   12
    •      A consultation on freezing the
           student loan repayment threshold                                                                                     10
           for five years
    •      Allowing universities offering ‘high                                                                                 8
           teaching quality’ to increase fees in
           line with inflation from 2017                                                                                        6
    •      A review of the discount rate
           applied to the accounting                                                                                            4
           treatment of loans.
    After consultation the Government                                                                                           2

    decided to freeze the repayment
    threshold for all post-2012 borrowers.                                                                                      0
                                                         2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
    The discount rate used for the public
    accounting of loans was reduced from             8
                                                                                                             HEFCE FUNDING
                                                                                                            £ billion 2015-16 prices
    2.2% to 0.7%. These changes were
                                                     6                                          Teaching   Research   Capital       Other
    expected to result in savings to
    current spending when grants are                 4
    ended, and a substantial cut in the
    subsidy element of loans.                        2

    On 1 October 2017 the Prime Minister     0
    announced a number of changes to           2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

    these policies: The fee cap would be
    frozen in 2018-19, the repayment threshold would rise to £25,000 and a there would be a
    review of the student finance system. The Department for Education subsequently
    confirmed that the freeze on the repayment threshold would also be removed.
    On 19 February 2018, the Prime Minister announced that there would be a “wide-ranging
    review into post-18 education” led by Philip Augar. The review is to look at how future
    students will contribute to the cost of their studies, including “the level, terms and
    duration of their contribution.” More detail on the review can be found at: Review of Post-
    18 Education and Funding
    Students can take out publicly subsided loans to pay for tuition fees. Lending to students
    has increased substantially since 2012 and is expected to be more than £15 billion this
    year, compared less than £4 billion which goes to universities through the funding
    council. The Government’s decision to replace maintenance grants with loans means that
Number 7393, 17 July 2018     4

even more support for higher education will come through loans rather than direct
spending.
The subsidy element of loans is not included in the Government’s main measure of public
spending on services and hence does not count towards the fiscal deficit. The total face
value of loans do count towards the national debt.
There is considerable uncertainty about the final size of the subsidy element of loans and
the Government’s estimate of it increased sharply after the 2012 reforms were first
announced. Subsequent changes to loan terms and accounting methods are expected to
reduce the size of this subsidy to an even greater degree. These calculations affect the
size of any saving in public expenditure and the extent of the shift in costs from the state
to the individual beneficiary.
This paper looks at recent levels of funding for higher education in England, particularly
the period from 2015 onwards. It builds on and replaces Changes to higher education
funding and student support in England from 2012/13 and HE in England from 2012:
Funding and finance which looked in detail at the impact of the 2012 reforms and
subsequent announcements on graduates, universities and public spending.
The briefing paper Higher education student numbers looks at how student numbers have
changed over time, gives some insight into the impact of the 2012 higher education
reforms on different types of students and courses and summarises the last evidence on
applications. Readers may also be interested in the following briefing papers:
      •     Prime Minister's announcement on changes to student funding
      •     Higher education finance statistics
      •     Student loan statistics
      •     Tuition fee statistics
      •     The value of student maintenance support
      •     Support for postgraduate students in England
      •     Higher education tuition fees in England
5   Higher education funding in England

    1. Background
    1.1 ‘2012’ reforms
    The Independent Review of Higher Education Funding – the Browne
    Report 1- was published in October 2010. It made recommendations on
            0F

    the future funding and organisation of the higher education sector and
    on student finance. The main recommendations directly connected to
    funding were:
    •      Remove direct public funding for most undergraduate courses and
           retain a much smaller amount for higher cost subjects.
    •      Remove the cap from tuition fees. Institutions would keep all the income
           up to £6,000 per year and share any more with Government.
    •      Extend student loans to part-time students
    •      Increase the loans repayment threshold from £15,000 to £21,000 and
           increase it in line with earnings in the future.
    •      Introduce a real interest rate on loans for those earning above the
           threshold equal to the Government’s cost of borrowing (inflation plus            The 2012 reforms
           2.2%) and ensure no one repaying their loan sees its real value increase.        increased the cap
    •      Extend the write-off period of loans from 25 to 30 years                         on fees to £9,000.
    •      Increase student numbers by 10% to remove excess demand                          Student loans
                                                                                            increased to pay for
    The report concluded that, with static number of students, the reforms
                                                                                            this but the reforms
    would eventually cut core public spending on undergraduate study by
                                                                                            made repayments
    around £1.8 billion or almost 30%, graduates would repay more (55%
                                                                                            more ‘progressive’
    more with fees of £8,000) but additional repayments would come from
    higher earning graduates and institutions could see an increase in their
    income 2 with fees of around £7,000 or more (10% with fees of £8,000). 3
                 1F                                                                    2F

    The Government announced its plans for reform of higher education
    and student finance in November 2010. 4 These followed many of the
                                                   3F

    recommendations set out in the Browne Report. The major differences
    with an impact on funding were:
    •      A cap on fees of £9,000, no levy on fees above this level, but obligations
           on the institution to spend more on access for disadvantaged students
    •      A real interest of 3% above inflation for graduates earning above
           £41,000 (in 2016) with a sliding scale rising from 0% (real) at £21,000

    1   Securing a sustainable future for higher education –An independent review of
        higher education funding & student finance
    2   Income from these fees and teaching grants only
    3   ibid. pp43-44
    4   Reform for higher education and student finance, BIS (3 November 2010)
Number 7393, 17 July 2018     6

•       Annual uprating of both thresholds in line with growth in average
        earnings 5
                                                                                          Funding for higher
                 4F

•       No growth in student number
                                                                                          education was cut
                                                                                          dramatically in the
1.2 Comprehensive Spending Review 2010                                                    2010 CSR as
        and later spending rounds                                                         funding reforms
                                                                                          shifted the balance
The Comprehensive Spending Review 2010 (CSR) set out the                                  from taxpayers to
parameters for public spending over the period 2011-12 to 2014-15.                        graduates
Total resources for higher education (excluding research) was to fall
from £7.1 billion in 2010-11 to £4.2 billion in 2014-15; 6 a cut of 41% in
                                                              5F
                                                                                          Further smaller
cash terms and 44% in real terms. 7      6F
                                                                                          scale cuts were
                                                                                          announced in 2013
The Spending Round 2013 announced a series of further savings from
                                                                                          alongside the
the higher education budget –the continued cuts in funding for
                                                                                          decision to remove
teaching as the 2012 system applies to more students, freezing grants,
                                                                                          the cap on student
requiring HEFCE to make additional savings and cutting access
                                                                                          numbers
spending.8 Autumn Statement 2013 announced the cap on student
            .

numbers would be raised in 2014-15 and lifted in 2015-16 which would
increase spending compared to what it would otherwise have been. The
Government expected to fund this through the sale of some older
student loan debt.

1.3 Summer Budget 2015 and Spending
        Review/Autumn Statement 2015
In his Summer Budget 2015 the Chancellor announced that
maintenance grants would end for new students from 2016/17 and be
replaced by loans. He also announced consultations on freezing the
repayment threshold for five years, allowing some universities to
increase fees in line with inflation from 2017 and a review of the
discount rate applied to the accounting treatment of loans. 9 These are23F

the biggest changes to student finance since the 2012 reforms.
The Government published a consultation on freezing the loan
repayment threshold in July 2015. This set out two options for change:
    •    Option 1 (preferred): Freeze the threshold at £21,000 from April 2016
         for all existing and new borrowers for five years. Reviews the threshold
         from April 2021

5   The initial proposal was for five-yearly upratings.
6   BIS news release 20 October 2010, The Department for Business Innovation and Skills
    Spending Review Settlement
7   Adjusted using March 2015 GDP deflators and OBR projections.
8   Spending Round 2013, HM Treasury
9   Summer Budget 2015, HM Treasury
7   Higher education funding in England

         •    Option 2: Freeze the threshold for new borrowers only for five years
                                                                                              2015 saw the
              from April 2020
                                                                                              announcement of
    The consultation estimated that option 1 would generate £3.2 billion                      the biggest reform
    (current/discounted values) in additional graduate repayments from                        of student finance
    existing borrowers. On top of this one-off amount there would be an                       since the 2012
    additional £0.9 billion for each £15 billion of loans to new students. 10        24F

                                                                                              reforms. Grants
    Under Option 2 only the amount for new students (put at £1.0 billion                      would be ended,
    per £15 billion of loans) would apply. 11    25F

                                                                                              the fee cap raised
                                                                                              and the loan
    The Government published its response to the consultation in                              repayment
    November 2015. 12 It accepted that most responses did not support
                        26F

                                                                                              threshold would be
    freezing the threshold, but said it would implement its preferred option                  frozen –making the
    –freeze the repayment threshold for all post-2012 borrowers at £21,000                    system less
    until at least April 2021. An equality analysis was produced alongside                    ‘progressive’.
    the consultation response. 13 This looked at the impact on different types
                                    27F

    of ‘protected characteristics’ such as age, sex, disability and ethnicity.
    The Spending Review and Autumn Statement 2015 made some
    headline announcements about funding paid through the funding
    council, the extension of maintenance loans to part-time students and
    new loans for Master’s degrees. It also announced that the discount
    rate applied to loans would be reduced to 0.7% and set the spending
    totals for the Department for Business, Innovation and Skills which will
    eventually feedthrough to annual funding allocations for higher
    education.
    The notes on maintenance support and loans look at the impact of
    these changes on students/graduates. Some estimates of the impact on
    public spending are included in the next sections which look at each
    main element in turn.

    1.4 Prime Minister's October 2017
             announcement
    On 1 October 2017 the Prime Minister announced14 that there would be
    changes to the student finance system including:
    •        freezing tuition fees at the 2017/18 level of £9,250
    •        raising the student loans repayment threshold from £21,000 to 25,000
    •        a review of the student finance system

    10   This volume of loans is approximately the amount that might be lent to each cohort
         of new students.
    11   Consultation on freezing the student loan repayment threshold, BIS (July 2015)
    12   Freezing the student loan repayment threshold Government response to the
         consultation on freezing the student loan repayment threshold, BIS (November 2015)
    13   Freezing the student loan repayment threshold. Equality analysis, BIS (November
         2015)
    14   “Theresa May pledges help for young on student fees and housing”, BBC News, 1
         October 2017
Number 7393, 17 July 2018   8

The Secretary of State gave more detail on the changes to student
finance in a Written Statement on 9 October:
•     The lower repayment threshold will increase to £25,000 from the start of
      financial year 2018-19.
                                                                                 Changes
•     The upper repayment threshold will be increased at the same time           announced by the
•     Both thresholds will be adjusted annually in line with average earnings.   PM in October 2017
•     These changes apply to borrowers taking out post-2012 loans. Around        reverse some of the
      600,000 borrowers would benefit from lower repayments in 2018-19           2015 decisions and
                                                                                 make each £ of
This means that as well as the one-off increase in the threshold these           student loans more
changes reverse the earlier policy to freeze the threshold.                      expensive to the
The freeze on fee levels means a small cut in the amount the                     public sector
Government expects to lend as fee loans and a drop in fee income for
institutions (compared to the earlier policy). Raising and unfreezing the
threshold has a greater impact on the public finances in the longer term
as it cuts the loan repayments and hence increases the subsidy element
or cost of loans. More detail is given in the section on loans in section
2.2 and in the briefing paper Prime Minister's announcement on
changes to student funding.
On 19 February 2018, the Prime Minister announced that there would
be a “wide-ranging review into post-18 education” led by Philip Augar.
The review is to look at how future students will contribute to the cost
of their studies, including “the level, terms and duration of their
contribution.” More detail on the review can be found at: Review of
Post-18 Education and Funding

2. Public spending on higher
      education in England
There are three main elements of public spending on higher education
–direct funding through the Higher Education Funding Council for
England (HEFCE) which covers both teaching and research, student
maintenance grants and student loans. HEFCE closed in March 2018 and
its role in funding teaching was taken over by the Office for Students
and funding research by Research England

2.1 Direct funding through the funding
      council
The Secretary of State writes to the funding councils around the turn of
each year to set out funding, priorities, student numbers and related
matters for the following financial year. Occasionally these letters cover
more than one year and sometimes revised versions are published. The
most recent funding letters for the Office for Students and Research
England were published in February and March 2018 respectively.
9   Higher education funding in England

    Funding for teaching 2018-19, research was for 2018-19 and indicative
    totals for 2019-20. Earlier funding letters from the mid-1990s onwards
    can be found at: http://www.hefce.ac.uk/funding/annallocns/Archive/
    The following table summarises this          8
                                                                                 FUNDING COUNCIL ALLOCATIONS
    funding and estimated fee loans from the                                                           £ billion 2016-17 prices

    latest funding letters. Changes to the       6                                     Teaching    Research   Capital    Other

    main elements in real terms are
    illustrated opposite. More details are       4

    given in the table at the end of this
                                                 2
    paper.
                                                 0
                                                     2010-11   2012-13       2014-15              2016-17            2018-19
Number 7393, 17 July 2018 10

Total levels of funding for HEFCE fell even before                                   FUNDING FOR HIGHER EDUCATION INSTITUTIONS
                                                                                     £ billion 2016-17 prices
the 2012 reforms came in. Cuts in funding were
in the £0.8-0.9 billion range from 2011-12 to                                                                                                                      12

2015-16. After this, with almost all students on
the new funding regime, cuts have been much                                                                                                                        10

                                                                                       Fees
smaller.
                                                                                                                                                                   8
The large increase in fee income (from home
and EU students) meant that the total funding                                                                                                                      6

                                                                                       Funding councils
for institutions through both sources increased
in real terms in each year to 2016-17. It was then                                                                                                                 4

broadly maintained in the latest two years. This,
                                                                                                                                                                   2
and the balance between the two sources, is
shown opposite.                                                                                                                                                    0
                                                                                     2010-11                        2012-13     2014-15    2016-17       2018-19

 FUNDING FOR THE HE SECTOR IN ENGLAND
 £ billion cash
                                    2011-12 2012-13 2013-14 2014-15 2015-16                                         2015-16     2016-17 2017-18 2018-19
                                      Revised      Revised      Revised     Revised                       Initial     Revised    Budget   Budget     Budget

 Recurrent grants
   Teaching                                4.6          3.8          2.9         1.9                        1.7           1.5       1.5     1.5        1.4
   Research                                1.5          1.6          1.6         1.6                        1.6           1.6       1.7     1.7        1.7
 Capital                                   0.3          0.3          0.3         0.4                        0.6           0.6       0.5     0.4        0.5
 Other                                     0.2          0.2          0.3         0.2                        0.2           0.2       0.0     0.0        0.2
 Total via funding
 councils                                  6.7          5.9          5.0         4.1                        4.0           3.9       3.7     3.6        3.6

 Estimated regulated
 fee income                                2.6          4.2          5.6         7.0                        8.1           8.0       8.6     9.0        9.0

 Funding council and
 fee income                                9.3        10.1         10.6         11.1                      12.1          11.9       12.3    12.5       12.7

 Sources: Higher education funding for 2017-18, and earlier, BIS; Reductions to HEFCE teaching grant for 2014-15 and 2015-16 academic years, BIS;
 Strategic Guidance to the Office for Students –Priorities for Financial Year 2018/19, DBEIS; Science and Research -Funding and priorities, DBEIS

Teaching
The table above shows that direct recurrent funding for teaching fell by
£830 million or 20% in real terms in 2012-13. This was the first year that
included some students under the 2012 funding arrangements. This
funding is in financial years, which precede academic years, so in effect
it only includes the reduced funding for just over one half of one year of
students under the new arrangements. Further cuts of around
£950 million were made in 2013-14 and 2014-15 and £250 million in
2015-16.
The initial 2015-16 total was 66% below the below the 2011-12 level in
real terms. The subsequent cuts (revised figures) meant it was around
11   Higher education funding in England

     69% below the 2011-12 total. In 2015-16 almost all full-time
     undergraduates came under the post-2012 funding arrangements. This
     means that later cuts in funding for teaching have been more modest.
     The 2018-19 indicative total was 73% below the 2011-12 figure in real
     terms.
     The impact on what the funding councils planned to distribute up to
     academic year 2018/19 is given later in this paper.
     Spending Review 2015 announced that the teaching grant would be cut
     by £120 million in cash terms by 2019-20, but within this reduced total
     funding for high cost subjects will be protected in real terms. The
     student opportunity fund, which supports institutions in their efforts to
     widen access, will be cut by “…up to half.” 15     30F

     Research
     The 2012 changes in university funding directly affect teaching rather
     than research. Plans were set out for each year to 2014-15 soon after
     the 2010 CSR was published. The earlier table shows that recurrent
     funding for research broadly maintained its cash value up to 2014-15.
     The 2013 Spending Round kept the total resource (recurrent) science
     budget for 2015-16, which includes funding for Research Councils and
     other areas, at the same cash level as earlier years. Total capital funding
     for science was increased, partially reversing earlier cuts. 16     31F

     Spending Review 2015 announced that total science funding, which
     includes HEFCE research grant and funding paid through the Research
     Councils, will be protected in real terms to the end of the (then) current
     Parliament. 17  32F

     Research funding paid to higher education institutions through HEFCE
     and now Research England funds the research capacity and
     infrastructure –such as the salaries of permanent academic staff,
     premises, libraries etc- while the Research Councils fund specific
     research projects.

     Other
     The 2014-15 letter incorporated the cut to the National Scholarship
     Programme announced in the Spending Round 2013, ended separate
     funding for the Access to Learning Fund (which provided hardship
     payments), directed HEFCE to combine this with its student opportunity
     funding 18 for institutions and also included the implications of the
               35F

     Autumn Statement 2013 for funding through HEFCE. The 2015-16 letter

     15   Department for Business, Innovation and Skills’ settlement at the Spending Review
          2015, 25 November 2015
     16   Spending Round 2013, HM Treasury
     17   Department for Business, Innovation and Skills’ settlement at the Spending Review
          2015, 25 November 2015
     18   The student opportunity stream is meant to support institutions’ efforts to widen
          participation and allow then to meet the higher costs of supporting disadvantaged
          and under-represented students through their courses
Number 7393, 17 July 2018 12

confirmed earlier allocations. The ‘other’ line in 2018-19 includes
additional funding for research linked to specific objectives rather than
general research funding grant.

2.2 Student loans
There are two types of student loans –fees and maintenance. Full-time
home and EU students on qualifying courses can take out a loan to
cover the tuition fees for their course. From 2012 new part-time
students on courses with an intensity of 25% or greater became eligible
for loans. Maintenance loans for part-time students will be introduced
in 2018/19. Master’s loans for postgraduates of up to £10,000 were
introduced in 2016/17 and Doctoral loans will be introduced in 2018.
These loans are intended to contribute towards fees and living costs.
Maintenance loans are available to home students only. The amount
someone can take out as a maintenance loan depends on their
household income, where they live and where they study. Maintenance
loans entirely replaced by grants for new students from 2016/17. The
value of student maintenance support gives more details and Student
loan statistics gives more background about the system.
The Government has forecast that the total value of new loans to higher
education students in England will increase from £14.9 billion in 2017-18
to £19.7 billion in 2022-23. 19 This increase is driven by replacing grants
                                55F   20

with loans, but also by the expansion of loans to cover maintenance for
part-time students, fee loans for master’s and doctoral courses and
replacing nursing bursaries with loans.

Subsidy elements of loans and loan accounting                                 The accounting
The earlier table gave government estimates of the face value of fee          treatment of
loans to English students and EU students studying at English                 student loans
institutions. There are different treatments of the costs associated with     means they are not
loans in different parts of the Government’s accounts. The subsidy            included in the
element of loans made in any one year -the present value of the               deficit when they
amount not expected to be repaid- can be viewed as the ‘true’                 are made, but do
economic cost of loans in the longer term. The Department for                 count in full
Education includes an estimate of this in its accounts. It is what they       towards the
expect the subsidy element to be and is viewed as the permanent costs         national debt.
of the loan to the taxpayer. This system is known as resource
accounting and budgeting (RAB) or accruals accounting and has been
in place in the public sector for more than a decade. The subsidy
element is calculated as the face value of loans made in any one year
less the discounted or present value of future repayments. This can be
thought of as the amount of money lent to students that the
Government does not expect to get back. It is frequently expressed as a
proportion of the value of loans, the so-called RAB charge.

19   Student loan forecasts, England: 2017 to 2018, DfE
20   Economic and fiscal outlook – March 2017, OBR (table 2.49)
13 Higher education funding in England

   Spending on student loans (cash outlays) is classed as a financial
   transaction and not included in the Government’s main measure of
   public spending on services. It therefore does not count towards the
   fiscal deficit21. Similarly, loan repayments have no impact on this fiscal
   aggregate either. Under this measure only loan interest and write-offs
   are counted. The interested added to the outstanding debt on loans
   counts as income and write-offs as expenditure.
   The impact of student loans in the national debt22 is, broadly speaking,
   the opposite of that on the deficit. Loan outlays increase the debt by
   their face value, loan repayments reduce the debt also by their face
   value. Interest and write-offs have no impact.
   Loans therefore are treated very differently in the fiscal deficit and
   national debt. The difference is really one of timing with the costs being
   recorded upfront in the debt and only after they are written off (after 30
   years for most) in the deficit. Overall costs for a cohort of loans will
   eventually be the same under each method. In July 2018 the Office for
   Budget Responsibility published a paper that looked at the ‘fiscal
   illusions’ resulting from the different accounting treatment of loans in
   government accounts and made suggestions for alternative
   approaches.23 The Office for National Statistics, which publishes public
   finance statistics, is also looking at potential improvements to the way
   loans are recorded.

   Estimates of the resource costs of loans from
   2012
   Pre-2015 reforms
   The Government made estimates of the percentage RAB rate on new
   loans from 2012 when it published proposals for changes to funding.
   These are discussed in some detail in Changes to higher education
   funding and student support in England from 2012/13. The estimated
   RAB rate on new loans was put at ‘around 30%’, but subsequently
   increased to ‘around 35%’ 24 then to 35%-40% 25, revised upwards again
                                    36F                        37F

   to ‘around 40%’ 26 and later to ‘around 45%’. 27 These increases were
                       38F                               39F

   largely due to changes in economic forecasts, particularly on earnings. 28           40F

   These less optimistic forecast reduce the expected cash value of

   21   Public Sector Net Borrowing
   22   Public Sector Net Debt
   23   Working paper No.12 Student loans and fiscal illusions, OBR July 2018
   24   HC Deb 4 July 2013 c775-6W
   25   HC Deb 9 December 2013 c5W
   26   HC Deb 19 December 2013 c780W
   27   HC Deb 20 March 2014 c706W
   28   The OBR links lower earnings growth to “…much weaker-than-expected growth in
        productivity.” They also note that the data now used for modelling repayments,
        including that from the Student Loans Company, have widened the modelled
        distribution of earnings among graduates. This wider distribution cuts expected
        repayments, even if average earnings remain unchanged. Fiscal Sustainability Report
        – July 2014, OBR
Number 7393, 17 July 2018 14

repayments and or delay when they will be made. Other factors behind
the increase in the RAB rate include the higher than expected level of
average tuition fee loans, a change to the timing of repayment
threshold uprating, lower assumed repayments from the extra students
who start higher education because the numbers cap is lifted 29 and        41F

improvements to the Governments loan repayment model which is
used to forecast repayments and hence calculate the resource costs of
loans. 30 Much more detail on these increases are given in the paper HE
        42F

in England from 2012: Funding and finance                                                   Government
Post 2015 reforms                                                                           estimates of the
                                                                                            subsidy value of
The different elements of the changes to student finance announced in
                                                                                            loans have varied
the Summer Budget all have an impact on student loan outlays and the
                                                                                            greatly due to
RAB rate/charge. Replacing maintenance grants with loans will increase
                                                                                            changes in
the cash amount loaned. This on its own would increase the RAB rate,
                                                                                            modelling and
but as the increase will be largely for those from lower income
                                                                                            policy. The latest
backgrounds –which is linked to some extent to lifetime earnings- the
                                                                                            are 40-45% of the
increase will be larger still as a smaller amount is expected to be repaid.
                                                                                            face value of loans
Freezing the repayment threshold will increase repayments and hence
cut the RAB rate. Allowing some institutions to charge above £9,000 will
increase tuition fee loan amounts and increase the RAB rate slightly.
Reviewing the discount rate applied to loans is meant to bring this in
line with the Government’s long-term cost of borrowing. It has no
impact on loan outlays or the cash value of repayments and hence no
impact on borrowers. It is an accounting change that has a large impact
on the RAB rate, cutting it substantially.
The Government’s estimates of the savings from freezing the
repayment threshold from 2016 were set out earlier; £3.2 billion
additional repayments from existing borrowers plus £0.9 billion for each
£15 billion of loans to new students. It did not include any estimate of
the combined savings from the Summer 2015 ‘package’ in Spending
Review 2015, but a subsequent written answer estimated that the RAB
charge would be reduced to 20-25%. 31         53F

Post October 2017 announcement
The Government has estimated that the changes to the loan repayment
thresholds will increase the RAB charge rate from “…around 30%”, ie.
somewhat higher than their earlier estimates, “…to between 40% and
45%”.32 This latest range, 40-45% is broadly equivalent to the estimate
from before the 2015 reforms despite the cut in the discount rate used
to calculate this figure.33

29   HC Deb 10 December 2013 c130W
30   These are summarised in the National Audit Office report Student loan repayments
31   PQ HL 5098 [on Mature students: Loans] 18 January 2016
32   PQ 116250 [On Students: Loans] 1 December 2017
33   In other words the actual expected cash flows are fiscally ‘worse’ under the latest
     arrangements, but the lower discount rate counteracts this in accounting terms
15 Higher education funding in England

   June 2018 estimates
   The Department for Education published new estimates of the RAB
   charge alongside various forecasts connected with loans in Student loan
   forecasts, England: 2017 to 2018. These gave different estimates for
   different types of loan made in financial year 2017-18:
   •        Full-time:                    45%
   •        Part-time:           40%
   •        Master’s             0%
   The estimates for full-time and part-time students under are in line with
   the earlier 40-45% range. Because the total value of loans to full-time
   students is so much larger a weighted average of the two is 44.9%.
   Master’s loans are made under different terms34 and this, alongside the
   smaller total value of loans and expected higher earnings, means that
   the RAB charge is much lower. In fact the calculated rate from the
   model and standard discount rate is -6%, but under Government
   accounting rules RAB charges “…cannot be negative”.35

   Impact of loans on the national                                   ADDITIONS TO NET DEBT FROM STUDENT LOANS,
                                                                     % of GDP

   debt                                                              12%

                                                                     10%
   The latest Office of Budget Responsibility
                                                       8%
   projections of the impact of all (UK) loans on the
   national debt are illustrated in the chart          6%

   opposite. These were made before the October        4%

   2017 announcement on changes to the                 2%

   repayment thresholds. The (cumulative) addition     0%

   to debt increases rapidly from 4.5% of GDP to a      2016-17           2026-27           2036-37
                                                         Source: Fiscal Stability Report 2017, OBR
                                                                                                      2046-47   2056-57   2066-67

   peak of 11.1% around 2040 before falling back to
   below 10% in the 2050s. Additions to national debt are net lending
   (loan outlays minus repayments) plus accrued interest and write offs.

        Box 1: Loan repayment models
        Government estimates of the RAB cost of student loans are calculated using a student loan repayment
        model. This makes long term forecasts of repayments for individual borrowers and is highly complex.
        There is a substantial amount of uncertainty about future repayment levels which are connected in
        large part to earnings growth forecasts. The paper HE in England from 2012: Funding and finance looks
        in depth at changes/improvements to the loan model over time.

        The BIS accounts give an idea of the sensitivity of the model to assumptions about inflation and
        earnings. If RPI were around 4% higher (or lower) than forecast (ie. 3.1% rather than 3.0%) then the

   34    Plan 3 repayment system. Borrowers repay 6% of any income above the threshold
         (currently £21,000). Interest is RPI+ 3%. Repayments are made alongside (in addition
         to) any undergraduate or Plan 2 loans.
   35    Student loan forecasts, England: 2017 to 2018, DfE (Table 4)
Number 7393, 17 July 2018 16

     value of post-2012 loans held would be 1% or £225 million lower (or higher) than the model suggests.
     This difference is said to be larger than the inherent random variation in the model. Similarly if earnings
     growth were 2.4% higher than forecast (ie. 4.6% rather than 4.5%) then the value of post-2012 loans
     held would be 1% or £225 million higher than the model suggests (and vice versa).36

     A simplified version of the model used to produce estimates for their accounts was made public to
     inform debate around the changes to funding in 2012. An updated version of the publicly available
     model was made available in January 2014. This model was revised and updated in June 2014 and in
     July 2015.

2.3 Student support
Spending on student maintenance grants37 was just under £1.3 billion in
academic year 2010/11 and increased in cash terms in each subsequent
year to just over £1.6 billion in 2015/16.38 It overtook funding for
teaching and for research (both via HEFCE) as the most important single                Summer budget 2015
source of direct39 public expenditure on higher education in 2015/16.                  announced that for
With research funding protected and support for teaching reduced to                    new students from
high cost and priority subjects this was the one remaining area where                  2016/17 loans would
substantial savings to direct public expenditure could be made.                        entirely replace
In his Summer Budget 2015 the Chancellor announced that                                grants and the total
maintenance grants would end for new students from 2016/17 and be                      maintenance support
replaced by loans. The Government estimated that abolishing grants                     available would be
and replacing them with loans for new students from 2016 could save                    increased for
£2.5 billion (cumulatively) by 2020-21. 40 Provisional data for academic               students from lower
                                                                                       and middle income
                                             60F

year 2016/17 showed the amount awarded was £1.05 billion; a drop of
almost £0.6 billion or 36%.41 Early data for 2017/18 (up to mid-                       households
November) indicates a further fall to £0.55 billion42

2.4 Overall public spending
Overall spending levels (including the subsidy element of loans) up to
2015-16 are given in HE in England from 2012: Funding and finance.
The shift in expenditure away from direct funding in the period from
2010 to 2016 was marked. Overall spending changed little in cash terms
as higher loan subsidy amounts outweighed cuts in funding for
teaching.

36   Annual Report and Accounts 2015-16, BIS
37   Includes special support grants
38 Student support for higher education in England 2016, SLC. (Table 2)
39 Excludes loan funding which is indirect.

40 Summer Budget 2015, HM Treasury

41 Student Loans Company, Student Support for Higher Education in England 2017:

   academic year 2016/17 payments, 2017/18 awards (Table 2)
42 ibid (Table 6.3)
17 Higher education funding in England

   Up to 2018-19
                                                                      HE SPENDING PLANS
   Estimated overall spending levels up to 2018-19 are given          £ billion
   opposite. They include the subsidy element or economic              Grants
                                                                                                                          10

   cost of loans. For this chart an estimated RAB charge of          and other
   44.9% has been applied to loans in each year.43 Lower                                                                  8

   estimate s were made before the Prime Minister’s
   announcement of changes to thresholds, but as the chart           Student                                              6
                                                                       loans
   looks at lending made each year (and repaid over the
   following 30 years under the new terms) the current                                                                    4
   higher rate has been applied. Cuts in maintenance grants
                                                                     Research
   have been projected forward and converted to financial                                                                 2
   year figures. The funding data council data is that shown         Teaching
   in the earlier table.                                                                                                  0
                                                                                  2015-16   2016-17   2017-18   2018-19
   The main pattern over these years is the shift from
   (maintenance) grants to loans. The real value of total public spending
   falls slightly in real terms (on this basis) in 2017-18. There is a larger fall
   in 2018-19 of around 6% in real terms as spending on grants continues
   to fall. After 2018-19 we would expect no major change in the real value
   of these figures without any further policy changes, RAB charge
   revisions or unexpected patterns in student numbers

   3. Funding for institutions from
           the funding councils
   Links to details of final allocations from the funding council to individual
   institutions are given below:
   •       2012/13
   •       2013/14
   •       2014/15
   •       2015/16
   •       2016/17
   •       2017/18
   2018/19 allocations from the two new funding bodies can be found at:
   •       Office for Students
   •       Research England

   43   Plan 2 loans for full-time and part-time HE students only.
Number 7393, 17 July 2018 18

FUNDING FOR THE HE SECTOR
Funding council allocations and tuition fee income, England

                                                                                        £ million cash                                                                                             £ million 2016-17 pricesa
                                                 2011-12 2012-13 2013-14 2014-15 2015-16 2015-16 2016-17 2017-18 2018-19                                           2011-12 2012-13 2013-14 2014-15 2015-16 2015-16 2016-17 2017-18 2018-19
                                                    Revised     Revised     Revised     Revised                                                                      Revised     Revised     Revised      Revised
                                                 allocation allocation allocation allocation           Initial    Revised     Budget      Budget      Budget       allocation allocation allocation allocation          Initial   Revised      Budget       Budget       Budget

Recurrent grants
Teaching                                              4,645      3,815       2,861       1,915        1,671        1,521      1,539       1,457        1,388          5,034       4,050       2,986        1,970       1,671       1,521        1,539       1,430        1,342
Research                                              1,549      1,587       1,573       1,573        1,573        1,573      1,695       1,716        1,653          1,679       1,685       1,642        1,618       1,573       1,573        1,695       1,685        1,599
Total                                                 6,194      5,402       4,434       3,488        3,244        3,094      3,234       3,173        3,041          6,712       5,735       4,628        3,589       3,244       3,094        3,234       3,115        2,941
Additional funding                                                                                                                                                                                                                                                              0
Voluntary matched giving                                 63           0           0            0           0           0            0           0          0              68           0           0            0           0           0             0           0             0
Access to Learning Fund                                  40          37          37            0           0           0            0           0          0              43          39          39            0           0           0             0           0             0
National Scholarship Programme                            0          50         100           50           0           0            0           0          0               0          53         104           51           0           0             0           0             0
Postgraduate provision                                    0           0           0            0          50          50            0           0          0               0           0           0            0          50          50             0           0             0
Additional research fundingb                              0           0           0            0           0           0            0           0        168               0           0           0            0           0           0             0           0           162
Capital funding
Teaching                                                95          90           79         154         300         300          140         150         150            103           96          82         158         300          300         140          147            145
Research                                               204         195          251         286         303         303          338         203         336            221          207         262         294         303          303         338          199            325
Total                                                  299         286          330         440         603         603          478         353         486            324          304         344         453         603          603         478          347            470
All funding for institutions via
funding councils                                      6,709      5,893       5,014       4,091        4,010        3,860      3,712       3,552        3,695          7,270       6,256       5,234        4,209       4,010       3,860        3,712       3,487        3,574
Estimated fee income from
home/EU students subject to
regulated feesc                                       2,600      4,200       5,600       7,000        8,100        8,000      8,600        9,000       9,000          2,818       4,459        5,845       7,202       8,100       8,000        8,600        8,836       8,703

Total for institutions via funding
councils and regulated fee
income                                                9,309    10,093      10,614       11,100      12,100        11,860     12,300      12,500      12,700         10,088      10,715       11,079      11,421      12,100       11,860      12,300       12,272      12,281

(a) Adjusted using March 2018 GDP deflators
(b) Includes contribution from GCRF, Connecting Capabilities Fund and uplift to Higher Education Innovation Fund
© Estimated as £9 billion in financial year 2018-19

Sources: Higher education funding for 2017-18, and earlier, BIS/HEFCE; Reductions to HEFCE teaching grant for 2014-15 and 2015-16 academic years, BIS; Strategic Guidance to the Office for Students – Priorities for Financial Year 2018/19, DBEIS; Science and Research -
Funding and priorities, DBEIS
The House of Commons Library research service provides MPs and their staff
                            with the impartial briefing and evidence base they need to do their work in
                            scrutinising Government, proposing legislation, and supporting constituents.
                            As well as providing MPs with a confidential service we publish open briefing
                            papers, which are available on the Parliament website.
                            Every effort is made to ensure that the information contained in these
                            publically available research briefings is correct at the time of publication.
                            Readers should be aware however that briefings are not necessarily updated or
                            otherwise amended to reflect subsequent changes.
                            If you have any comments on our briefings please email
                            papers@parliament.uk. Authors are available to discuss the content of this
                            briefing only with Members and their staff.
                            If you have any general questions about the work of the House of Commons
                            you can email hcinfo@parliament.uk.
                            Disclaimer - This information is provided to Members of Parliament in support
                            of their parliamentary duties. It is a general briefing only and should not be
                            relied on as a substitute for specific advice. The House of Commons or the
                            author(s) shall not be liable for any errors or omissions, or for any loss or
                            damage of any kind arising from its use, and may remove, vary or amend any
                            information at any time without prior notice.
                            The House of Commons accepts no responsibility for any references or links to,
BRIEFING PAPER              or the content of, information maintained by third parties. This information is
                            provided subject to the conditions of the Open Parliament Licence.
Number 7393, 17 July 2018
You can also read
NEXT SLIDES ... Cancel